The international monetary system is at a crossroads of two paths that look quite similar, but can produce very different results. As a consequence of the decline of the dollar's international role, of the creation of the euro and of the increasing propensity to diversify official reserves and private portfolios, the dollar standard (in force since the gold exchange standard, instituted at Bretton Woods, was abandoned in 1971) gave way to a multicurrency foreign exchange regime. As the deepest effects of the financial crisis gradually emerged, this monetary regime too has been subject to tensions, incompatible with a continued approval of globalization.
On the one hand, the action of individual States and the signing of international agreements, mostly on a regional scale, but also at inter-regional level (as in the case of the BRICs), is gradually transforming the multi-currency regime into a multi-basket regime. The most recent example of that trend is given by the Gulf monetary Union, which, in the intention of the adhering countries1, will materialize with the creation of the gulfo, a single currency bound to replace the dollar in the international contracts on crude oil.
On the other hand, the global objectives to redress fundamental unbalances, to stabilize the financial markets, to start a new investment cycle for a sustainable development, can be hardly met without recognizing cooperation, symbolically and substantially, as the “raison d'état” of globalization. A world currency would provide such a symbol, because “imprinted” no longer with the effigy of a monarch, but of a world institution, no longer with force but with law, and it would have a substance because it would rest on a reliable-enough “underlying asset”, the world's wealth, if we are able to preserve it.
The first, spontaneous path would not be incompatible with the second, managed at the global level, if they will keep pace with one another, consciously. It would lead instead to uncorrelated monetary blocs, with the risk of terrible monetary earthquakes along the fault lines, if the regional solutions are implemented in a disorderly fashion, in a hectic search for an alternative to the dollar, or even in panic situations during which the search for safety on the part of everybody will lead to the ruin of all.
Some American economists have well understood that opposing other currencies and SDRs to be put side by side with the dollar will be not only impossible but also dangerous for the United States. But while they accept that the dollar be accompanied by other financial instruments in official reserves and private portfolios, in a jumble of baskets, of exchange agreements between groups of countries, of dirty floating between currencies left to the markets, some for real, others as a sham, and others still subject to regimes of capital-movements control, those economists do not accept the perspective of a world basket of reference, which the dollar itself shall be referred to and which therefore shall replace it as the international currency. Fred Bergsten looks to me to be the most skilful supporter of that position, which, although marked by methodological nationalism, is anyway the most articulate, open and coherent with Obama's multilateral policy.
According to estimates of the Administration and the Congressional Budget Office (CBO), the balance deficits will exceed by far any previous record: in the short term due to the crisis, and in the long term due to the demographic and pension-related dynamics. The American public debt will reach 215% of GDP in 2039, and above 600% in 2080. Within less than ten years the expenditure for interests would touch 20% of federal revenues. Bergsten2 draws from such estimates some conclusions about the US international position: “the international economic position of the United States is likely to deteriorate enormously as a result, with the current account deficit rising from a previous record of six percent of GDP to over 15 percent (more than $5 trillion annually) by 2030 and net debt climbing from $3.5 trillion today to $50 trillion (the equivalent of 140 percent of GDP and more than 700 percent of exports) by 2030. The United States would then be transferring a full seven percent ($2.5 trillion) of its entire economic output to foreigners every year in order to service its external debt”3.
This is an unbearable scenario and implies, in Bergsten's opinion, three great risks to the United States: 1) if the world will finance the American debt, the conditions that led to the present crisis will replicate themselves; 2) if the world will not finance it, a collapse of the dollar (hard landing) will take place before 2030, 3) if the government will succeed in preventing any crisis, the debt service will impoverish the American people. It is therefore necessary to rapidly change the course.
“The United States should encourage two eminently feasible changes in the current international monetary order. The first is the further evolution of a multiple-currency system in which other monies increasingly share the international position of the dollar in private markets… Currently the dollar represents 65 percent of national reserves and the euro 25 percent. Those figures are likely to become much more balanced… The United States should not only accept a more varied currency regime as an inevitable reality, but actively encourage such a development as part of its effort to recalibrate its own international economic position. Second, in order to increasingly supplement national currencies in official monetary reserves, the International Monetary Fund can issue SDRs… This will enable countries to build up their reserves without having to run large trade and current account surpluses, thereby reducing pressure on the global trading system… The G-20 took a major step in this direction by agreeing in April 2009 to create $ 250 billion in SDRs, which were then allocated by the IMF in August. This took SDRs’ share of global reserves from a previous level of under one percent to about five percent. The G-20 and the IMF should now go beyond this step… to start a process of distributing SDRs annually, perhaps totalling $1 trillion over the next five years. In addition, the IMF should create a substitution account into which monetary authorities could exchange unwanted dollars (and others currencies) in return for SDRs without affecting global markets”4.
Certainly Bergsten does not ignore two fundamental critical points of the system that I define multi-basket. The first concerns the euro, which will experience an appreciation not justified by its underlying assets and by the European balance of payments, as it is the only real alternative to the dollar (besides the SDRs) until the renmimbi too will be convertible. The second concerns replacing the dollar with the SDRs. Denominating the new debts in SDRs instead of dollars would force the United States to observe a balance discipline like all the other countries. A recent study estimates that the possibility to underwrite debts in dollars (at low cost because they can always be printed and depreciated) and to invest in other currencies (with much higher gains) represents a benefit equivalent to 2.5% of GDP every year (the “exorbitant privilege”). On the other hand, replacing the dollar stocks (the old debt) with SDRs would imply an unfair advantage for the US creditors, to the disadvantage of the other countries contributing to the IMF (because for sure the US will not take upon itself the exchange risk). For these very reasons, in order to make the proposal more credible, Bergsten complements it with recommendations of economic policy, aimed at re-balancing the American public budget (reduction of expenditures for health-care and pensions, and tax increases on consumptions) and at bringing back the current expense balance deficit to not more than 3% of GDP, which Bergsten considers tolerable (probably because partially compensated by the persistence of the “exorbitant privilege” on the part of the debt that continues to be denominated in dollars).
Other American economists believe that the dollar will continue to be the Sun of the monetary system due to the absence of alternatives: the euro is a currency without State, the renmimbi is not convertible and will not benefit for many years from a well-developed financial market, the yen is the currency of an economy plunged for many years into a long stagnation, the gulfo will never be done, other currencies cannot even be seen, the SDRs are not liquid, there is no agreement on how to distribute them, and they have become the banner of the Chinese just because the Governor has to repel the domestic criticism of an excessive accumulation of dollars and has to communicate abroad in a symbolic fashion that China is in favour of a “rules-based multilateral system”. Barry Eichengreen's5 word, a well-respected economist and one of the most serious and less emphatic supporters of such a position.
Eichengreen is right in thinking of a world monetary system with one centre, but I believe he is deceiving himself, due perhaps to a reflection of a not-only-methodological nationalism, in believing that the dollar may any longer fulfill that function. The system I think of, as a European and a world federalist, has one Sun, a supra-national currency (initially an international basket), around which planets like the dollar, the euro, the gulfo, the renmimbi, the yen will rotate. Every planet will in turn stabilize a certain number of satellite currencies (the regional monetary areas).
The first step towards the creation of a world currency is the creation of one basket, similar to the ecu in the preparatory phase of the creation of the euro. The Governor of the People's Bank of China, Zhou Xiaochuang, is proposing to use an already existing instrument, the SDRs at the IMF, modifying their composition as well as the quotas and the voting rights at the IMF; and making the SDRs conversion in other currencies possible; promoting their use in international trade, in the quotation of raw materials and in the accounting of trans-national enterprises; allowing to issue bonds denominated in SDRs; endowing the IMF with a pool of reserves in order to strengthen the market's confidence in their value.
“… The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history… The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists… The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws… The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies… Keynes had already proposed to introduce an international currency unit named “Bancor”, based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted… The IMF also created the SDR in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system… A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity… This will significantly reduce the risks of a future crisis and enhance crisis management capability… The reform should be guided by a grand vision and begin with specific deliverables. It should be a gradual process that yields win-win results for all… In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings… Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency… This will require political cooperation among member countries… The scope of using the SDR should be broadened, so as to enable it to fully satisfy the member countries’ demand for a reserve currency… Compared with separate management of reserves by individual countries, the centralized management of part of the global reserve by a trustworthy international institution with a reasonable return to encourage participation will be more effective in deterring speculation and stabilizing financial markets. The participating countries can also save some reserve for domestic development and economic growth… The centralized management of its member countries’ reserves by the Fund will be an effective measure to promote a greater role of the SDR as a reserve currency. To achieve this, the IMF can set up an open-ended SDR-denominated fund based on the market practice, allowing subscription and redemption in the existing reserve currencies by various investors as desired. This arrangement will not only promote the development of SDR-denominated assets, but will also partially allow management of the liquidity in the form of the existing reserve currencies. It can even lay a foundation for increasing SDR allocation to gradually replace existing reserve currencies with the SDR”6.
It is not necessary to resort to game theory to assert, without any doubt, that the cooperation Zhou is calling for is indispensable for governing globalization and prevent it, if left to market forces alone, from threatening democracy, free exchanges and peace.
Cooperation is in China's interest, that's why it is proposing it, to reduce the cost of its own “investment in reserves” with the same achieved security; it is in the US interest, as its very strategic independence is threatened by an unceasing indebtedness to a few countries; it is in Europe's interest, as it can be driven to pay the highest price for the redressing of fundamental unbalances it is not responsible for, through the appreciation of the euro, the loss of competitive margins, the rise of unemployment.
Only Europe, among the big players, even though it has got the experience of the creation and the success of a supra-national currency, does not pursue with suitable initiatives its own interest in cooperation, the highest for the first trading power of the planet. On the contrary, Commissioner Almunia spoke a few months ago against Zhou's proposal, due to an old and misunderstood reflex of subjection to the United States. We wait and see what the new President of the Council Van Rompuy will do, hoping that he will be able to make full use of the message that the former Commission President Delors is sending him7: “The dollar remains indispensable and corrosive at the same time. We should be thinking of a global monetary system based on a basket of currencies. Because the dollar is a yo-yo and the Americans have taken advantage of that to borrow more than is reasonable. Now they are somehow in the hands of the Chinese. Those responsible for the European economic and monetary union must take responsibility not with a view for the euro to replace the dollar, but to help create a more balanced global monetary system… The legal priority in our international order is the UN. So I think it is necessary that [an embryo of global economic regulation] be established between the United Nations, which holds the maximum of legitimacy, and the economic and financial G-20”. And concludes: “We [Europeans] are making no proposals… If Europe does not take care, within ten years we may well have a world run by two powers: the United States and China.”
1 The Gulf Cooperation Council sanctioned the birth, at the beginning of 2010, of a monetary council based in Riyadh, the embryo of a common central bank. At the moment Saudi Arabia, Kuwait, Bahrain and Qatar have joined, but in the future also other Emirates could join
2 C. Fred Bergsten, “The Dollar and the Deficits. How Washington can prevent the Next Crisis”, in Foreign Affairs, November/December 2009. He is Director of the Peter G. Peterson Institute for International Economics and was Assistant Secretary of the Treasury for International Affairs from 1977 to 1981 and Assistant for International Economic Affairs to the National Security Council from 1969 to 1971
3 Ibid., page 21
4 Ibid., pages 25-27
5 Barry Eichengreen, Reports of the Dollar’s Death are Exaggerated, Seventh Luca d’Agliano Lecture in Development Economics, Turin, December 2009
6 Zhou Xiaochuang, Reform the international monetary system, 2008
7 Jacques Delors, “Si Europa no se integra, mandaràn EE UU y China”, interview by Xavier Vidal-Folch, in El Pais, 6/12/2009